11. Impairment losses and reversal of impairment losses

As a rule, the discounted cash flow method is used to test the property, plant and equipment, the intangible assets, and the carrying amounts for impairment (generally based on the value-in-use approach). Impairment tests are conducted whenever impairment losses or a reversal of impairment losses are indicated. In addition, cash generating units (CGUs) and groups of CGUs containing goodwill as well as intangible assets with unlimited useful lives are tested for impairment at least once a year, specifically, in early March. The calculation is performed on the basis of the projected cash flows as per a five-year, medium-term business plan approved by management. This medium-term business plan is based on historical data as well as on assumptions regarding the expected future market performance. The Group’s planning assumptions are expanded by sectoral planning assumptions in this connection. Intra-Group evaluations are supplemented by external market studies.

The medium-term business plan was expanded by a rough planning stage (14 years) modeled on the appraisal and approval of the investment associated with greentec steel by the Supervisory Board in March 2023 for the CGUs affected by the technological transformation—particularly two key units: the Steel Division and Railway Systems. This extended planning period ensures that the determination of the perpetual annuity is based on a steady state. As regards the underlying assumptions, see the chapter, Uncertainties in accounting estimates and assumptions – Effects of climate and energy policies – Decarbonization strategy.

The determination of the perpetual annuity is based on country-specific growth figures derived from external sources. The capital costs are calculated as the weighted average cost of equity and borrowings using the capital asset pricing model (weighted average cost of capital (WACC)). The parameters used in connection with the determination of WACC are established on an objective basis. To date, a five-year mean value analysis of the forecast inflation has been used to determine both expected inflation in connection with the determination of the WACC and the growth rate of the cash flows in the perpetual annuity. This approach was no longer deemed appropriate given the enormous increase in the expected inflation over the short and the medium term—subject to consistent forecasts of long-term inflation expectations. As of September 30, 2022, therefore, the procedure was shifted to both forecast inflation and the long-term inflation expectation in the fifth year.

Impairment tests of CGUs or groups of CGUs containing goodwill

Goodwill is allocated to the following CGUs or groups of CGUs:

The following estimates and assumptions were used to measure the recoverable amounts of CGUs or groups of CGUs that account for a significant portion of the voestalpine Group’s total goodwill:

The Steel Division focuses on the production and processing of steel products for the automotive, white goods, electrical, processing as well as energy and engineering industries. The five-year, medium-term business plan for the Steel Division was prepared, for one, on the basis of external economic forecasts for the eurozone, the United States, China, and Mexico (based on the World Economic Outlook of the International Monetary Fund (IMF)¹) and, for another, taking into account expected steel consumption.² The production plan reflects the sales forecasts. The CRU Index was considered in the revenue planning for the flat products. Additionally, minor positive, quality-related adjustments were made in individual customer segments. As regards procurement, the planning was based on assumptions concerning raw materials derived from global market forecasts (on the basis of Platts price assessments³, among others). Given both these assumptions and the extremely successful business year 2022/23, the medium-term business plan projects that the gross margin will once again develop along a normalized trajectory, taking blast furnace lining work into account. The five-year medium-term business plan was supplemented by a rough planning stage. The latter includes the investments toward greentec steel—i.e., the substitution of two of the three blast furnaces by electric arc furnaces (EAFs) to be commissioned from calendar year 2027—as well as expected increases in emissions allowance prices and the incremental reduction in the number of no-cost allowances pursuant to European Union measures aimed at lowering CO₂ up until the elimination of the no-cost allowances in calendar year 2034.

The final plan year was used to determine the perpetual annuity based on an expected growth rate of 1.33% (2021/22: 1.40%). The after-tax WACC is 8.02% (2021/22: 6.71%); the pre-tax WACC is 9.96% (2021/22: 8.48%).

The five-year, medium-term business plan for the High Performance Metals Division and its two units to which goodwill has been allocated—i.e., High Performance Metals (HPM) Production and Value Added Services—was based on the general economic environment of the relevant industry segments (particularly the automotive, oil and natural gas, and aerospace industries) as well as on the growth forecasts⁴ for the regional sales markets of its core markets, especially the eurozone, the United States, China, and Brazil.

Seven production facilities around the world are combined in the HPM Production unit. Its manufacturing activities cover a highly complex and highly demanding range of production: tool steel, high-speed steel, valve steel, high-grade engineering steel, powder-metallurgical steel, powder for additive manufacturing, special steels, and nickel-based alloys. Product manufacturing ranges from smelting to transforming (rolling and forging, hot-rolled and cold-rolled strips) all the way to heat treatment and processing as well as fulfilment of the properties and specifications required by customers. The processing companies produce plate, profiles, and forged parts made of titanium alloys, nickel-based alloys as well as high, medium, and low-grade alloyed steels.

The internal forecasts and estimates of HPM Production—particularly with respect to the business that targets sophisticated metallurgical applications in the aerospace, oil and natural gas as well as automotive industries—rely on external sources of information and are consistent with them. The automotive segment expects motor vehicle production to grow in all regions, but the level prevailing prior to COVID-19 is not expected to be reached until calendar year 2026. The regions’ respective market shares are expected to remain stable.⁵ Electric mobility offers additional opportunities for growth. Demand in the oil and natural gas/CPI segment is expected to remain high in the long term. The decline in the demand for crude oil in the mobility segment (combustion engines) will be offset by greater demand for petrochemicals (CPI).⁶ The rebound in the aviation market continues unabated in the aerospace industry.⁷ Overall, this will lead to higher revenue and a positive gross margin trend in the planning period, not least due to the efficiency gains obtained through the new special steel plant in Kapfenberg, Austria, and the fixed cost digression.

Increases in the cost of input materials due to alloy prices as well as higher energy costs can largely be passed on to customers. The final plan year was used to calculate the perpetual annuity. The perpetual annuity is determined based on a growth rate of 1.62% (2021/22: 1.65%). The after-tax WACC is 8.35% (2021/22: 7.52%); the pre-tax WACC is 10.80% (2021/22: 9.64%).

In the Value Added Services business segment, the continued systematic expansion of services in the planning period will lead to both greater customer loyalty and deeper value creation. Pre-processing, heat treatment, and coating will also be expanded in line with customer requirements. Moreover, an all-out effort is being undertaken in coordination with the powder strategy of the HPM Production unit to turn additive manufacturing into one of the division’s core competences. Ongoing activities will additionally focus on the consistent pursuit of tried and tested cost-savings and optimization programs as well as on new initiatives, especially with respect to the processes related to the digital transformation, which will lead to higher revenue and a positive gross margin trend in the planning period.

Increases in the cost of input materials due to alloy prices as well as higher energy costs can largely be passed on to customers. The last plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.47% (2021/22: 1.61%). The after-tax WACC is 8.37% (2021/22: 7.88%); the pre-tax WACC is 10.83% (2021/22: 10.14%).

The Group’s expertise as the leading provider of high-quality rails, high-tech turnouts, and digital monitoring systems as well as all associated services was combined in the Railway Systems business segment to further expand the Group’s global presence as a provider of complete railway infrastructure systems. The five-year, medium-term business plan for Railway Systems is based on market forecasts⁸ and project planning for railway infrastructure, taking into consideration the business segment’s strategic focus and the ongoing digital transformation of the rail segment. It also accounts for the different levels of economic development in individual regions.⁹ As regards the development of material factor costs, general forecasts of the development of personnel expenses and internal assumptions on the development of steel prices were integrated into the budgets. The planning assumes that the gross margin will be kept relatively constant over the planning period and that potential fluctuations in individual markets will balance each other out due to the business segment’s global reach. Likewise, the investments toward greentec steel are included in both the five-year, medium-term business plan and the rough planning stage for one electric arc furnace in the pre-production stage, as are expected increases in emissions allowance prices and the incremental reduction in the number of no-cost allowances pursuant to European Union measures aimed at lowering CO₂ up until the elimination of the no-cost allowances in calendar year 2034.

The last plan year was used to determine the perpetual annuity based on an expected growth rate of 1.44% (2021/22: 1.53%). The after-tax WACC is 8.31% (2021/22: 7.54%); the pre-tax WACC is 9.94% (2021/22: 8.99%).

The five-year, medium-term business plan for the Welding business unit, which engages in the production and sale of welding and joining technology products, takes into account macroeconomic trends¹⁰ in each region as well as the projected developments in the relevant industry segments. The market shares relative to the competition in the given regions and the relative current market appeal of the Welding business unit were also taken into account. The expected price trends for raw materials, particularly alloys, were derived from current quoted market prices as well as available forecasts. Both volume growth and a largely constant gross margin are anticipated for the planning period, given market forecasts as well as the organizational measures and optimization programs that have been initiated, are being implemented, and will be pushed systematically during the planning period also. The positive effects from the unit’s development into a full welding solution provider were also taken into consideration. The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.41% (2021/22: 1.38%). The after-tax WACC is 8.38% (2021/22: 7.41%); the pre-tax WACC is 10.92% (2021/22: 9.52%).

The cash flow forecasts for Automotive Components are based on the medium-term market growth and production forecasts for the global automotive market based on the forecasts published by LMC Automotive,¹¹ in this case particularly for the most important markets in Europe, the USMCA region, and Asia, as well as for the most important customers—the European premium manufacturers. Internal estimates reflect the business segment’s internationalization and growth strategy. External indicators and market dynamics were adjusted in line with the current model portfolio of Automotive Components customers. The planning for the business year takes assumptions as to the current supply chain distortions into account. Furthermore, customer-specific information regarding medium-term outlooks and sales projections served as sources for the sales planning of Automotive Components. This will lead to higher revenue (especially based on a few larger ramp-ups and the ongoing improvement overall in the automotive industry) and a positive gross margin trend in the five-year, medium-term business plan. The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.33% (2021/22: 1.24%). The after-tax WACC is 9.20% (2021/22: 7.84%); the pre-tax WACC is 11.99% (2021/22: 10.31%).

Precision Strip specializes in the production of globally available, technologically complex cold-rolled strip steel products with precise dimensional accuracy, excellent surface quality, and unique edge profiles for the highest customer requirements in the process industry. The five-year, medium-term business plan for Precision Strip was prepared taking into account the general regional parameters in the core markets and reflects the general economic environment of the industry segments that are key to the entities. Current market conditions are characterized by stiff competition and strong pressure on margins. The growth indicated in the planning is largely based on securing market leadership in niche markets, expanding market share, and developing new markets. External forecasts were taken into account in internal estimates and generally adjusted very slightly downward. These external forecasts are country-specific figures for expected economic growth (GDP forecasts)¹² that were supplemented by industry-specific experience in the relevant markets for the respective product segments. Customer-specific information regarding medium-term outlooks and sales projections also served as sources for sales planning at Precision Strip. As a result, revenue is expected to increase, and the gross margin should be stable in the planning period. The fifth plan year was used to calculate the perpetual annuity based on an expected growth rate of 1.32% (2021/22: 1.41%). The after-tax WACC is 9.02% (2021/22: 7.76%); the pre-tax WACC is 11.35% (2021/22: 9.88%).

Impairment losses of CGUs or groups of CGUs containing goodwill

In the first half of the business year 2022/23, impairment of goodwill in the amount of EUR 119.3 million was recognized in the High Performance Metals Division at the HPM Production unit, to which the goodwill is allocated and which produces sophisticated stainless steels. The impairment loss was recorded in other operating expenses as of September 30, 2022. The impairment loss resulted from a planning update due to the significant increase in the discount rate (WACC), which was used as the basis for the impairment test. The recoverable amount (value in use) of this unit was EUR 2,228.2 million as of September 30, 2022. The fifth plan year was used to calculate the perpetual annuity. As of September 30, 2022, the perpetual annuity was expected to grow at a rate of 1.63% (2021/22: 1.65%). The after-tax WACC was 8.54% (2021/22: 7.52%); the pre-tax WACC was 11.06% (2021/22: 9.64%).

The impairment tests confirmed the carrying amount of all goodwill as of March 31, 2023. A sensitivity analysis of the aforementioned units to which goodwill has been allocated shows that the carrying amounts of the goodwill-bearing units—Steel Division, Value Added Services, and Precision Strip—would still be covered if the discount rate were to rise by one percentage point and thus that there is no need to recognize an impairment loss. Furthermore, the cash flow sensitivity analysis has shown that, if the cash flows are reduced by 10%, the carrying amounts of the Steel Division, Value Added Services, and Precision Strip would also still be covered. If the discount rate is raised by one percentage point and the cash flows are lowered by 10% as part of a combined sensitivity analysis, the carrying amounts of the aforementioned goodwill-bearing units (Steel Division and Value Added Services) would still be covered. In order to account for the growing uncertainties in the macroeconomic environment, the sensitivity analysis of net cash flows as of March 31, 2022, was expanded by an additional sensitivity analysis regarding the “reduction in cash flows by 20%.”

The following table shows the excess of the carrying amount over the recoverable amount as well as the amount by which both major assumptions would have to change for the estimated recoverable amount to be equal to the carrying amount (break-even analysis); it also shows the reduction in the carrying amount resulting from an increase in the after-tax discount rate by one percentage point or a decrease in the cash flows by 10% or 20% (general sensitivity analysis):

Sensitivity regarding decarbonization and technological transformation

The impairment tests of the cash generating units affected by the technological transformation—particularly the key units, Steel Division and Railway Systems—were carried out pursuant to a baseline scenario regarding the price premium (see explanations in the foregoing), where the price premium melts away up to the final plan year; the numbers used for determining the perpetual annuity thus do not include a price premium. An alternative scenario that does not include an assumed price premium for greentec steel was developed for each unit over and above the aforementioned general sensitivity analysis. In this scenario, too, the carrying amount of the Steel Division unit would still substantially exceed the recoverable amount; however, it would remain marginal in the case of the Railway Systems unit.

Impairment test of cash generating units that have no goodwill and of other assets

In the first half of the business year 2022/23, impairment losses of EUR 54.1 million were recognized in other operating expenses in the High Performance Metals Division at the cash generating unit Buderus Edelstahl ohne Schmiede (consisting of the steel mill, rolling lines, and drop forge sub-divisions), which is devoted to the production of drop-forged parts, semi-finished products, and hot-rolled and cold-rolled steel. The impairment loss resulted primarily from the increase in the discount rate (WACC) as well as from high energy costs. Due to the products’ low competitive differentiation, these increases can be passed on to the market only to a limited extent, thus leading to the loss of market share. The recoverable amount (value in use) for this unit as of September 30, 2022, was EUR 148.5 million. The after-tax discount rate that was applied as of September 30, 2022, was 7.91% (2021/22: 6.90%); the pre-tax WACC was 10.85% (2021/22: 9.44%).

As the lower limit for any further impairment is the fair value less costs to sell (individual sale proceeds), adjustments if any of the key forward-looking assumptions such as discount rates and cash flows would not lead to any further material impairment.

In the business year 2021/22, a total of EUR 63.7 million in impairment losses was recognized in other operating expenses (specifically, in “Plant, property and equipment” and in “Other intangible assets”) for the Cartersville CGU, which continues to produce hot-formed components for the automotive industry. The recoverable amount for this unit, as determined on the basis of its value in use, was EUR 13.5 million. The estimated fair values (net of the disposal costs related to the individually measured assets) were used as the floor to determine the impairment loss, resulting in a carrying amount of EUR 39.0 million after impairment. This comprised property, plant and equipment in the amount of EUR 20.7 million and the carrying amount of the working capital in the amount of EUR 18.3 million.

In the business year 2021/22, a reversal of impairment losses in the amount of EUR 11.8 million was recognized in other operating expenses (specifically, in “Land, land rights, and buildings”; “Plant and equipment”; as well as “Other equipment, operating and office equipment”) for the Schwäbisch Gmünd CGU whose product portfolio comprises hot forming and major component assembly. The recoverable amount (value in use) for this unit was EUR 160.4 million. An after-tax discount rate of 7.50% was applied; the pre-tax WACC was 10.17%.

In the business year 2021/22, impairment losses of EUR 15.3 million on “Plant and equipment” and “Fixtures and fittings” were recognized in other operating expenses for the Buderus Edelstahl ohne Schmiede CGU of the HPM Division. The impairment losses stemmed from increases in energy costs which, in this product segment, can be passed on to customers only in part. The recoverable amount (value in use) for this unit was EUR 141.1 million. An after-tax discount rate of 6.90% was applied; the pre-tax WACC was 9.44%.

An additional impairment loss of EUR 5.5 million (2021/22: EUR 1.2 million) was taken on individual facilities due to a lack of adaptive reuse.

¹ World Economic Outlook, International Monetary Fund (IMF)
² The European Steel Association (EUROFER) regarding steel consumption in Europe; World Steel Association for non-European data
³ S&P Global Platts
⁴ Deutsche Bundesbank, National Statistical Offices, German Council of Economic Experts
⁵ LMC Automotive Q4/2022
⁶ ExxonMobile Energy Outlook 2022
⁷ IATA 2022
⁸ UNIFE Annual Report
⁹ World Economic Outlook, International Monetary Fund (IMF)
¹⁰ World Economic Outlook, International Monetary Fund (IMF)
¹¹ LMCA GAPF Data
¹² World Economic Outlook, International Monetary Fund (IMF)